Tariff Fears Shift ETF Gains Toward Global Markets

European and emerging markets ETFs are outperforming their U.S. counterparts for the first time in years, as concerns about inflation and Trump administration tariffs spook domestic investors, according to research from CFRA.

Since Feb. 1, emerging markets exchange-traded funds have jumped 5.2% and European funds have added 3.5%. By comparison, the Vanguard S&P 500 ETF (VOO) has lost 2.2% over the past month

The long-time dominance of U.S. equity ETFs is wobbling lately as international alternatives gain momentum amid shifting economic conditions. Investors have grown accustomed to American market supremacy, with the iShares Core S&P 500 ETF (IVV) jumping more than 24% in both 2024 and 2023. Much of the growth was fueled by the so-called Magnificent 7 tech stocks, which accounted for over half of the S&P 500's gains last year, CFRA said.

But the winds appear to be shifting. Since early February, when tariff proposals were announced, emerging market and developed international ETFs have outperformed their U.S. counterparts, CFRA reports.

"U.S. domestic equity ETFs like the iShares Core S&P 500 ETF (IVV) have trailed non-U.S. ETFs like the iShares Core MSCI Emerging Markets ETF (IEMG) and iShares Core MSCI EAFE ETF (IEFA) since tariffs were proposed," CFRA's Head of ETF Research Aniket Ullal wrote in the research.

The turnaround coincides with January's Consumer Price Index showing a 3% annual increase, exceeding expectations and raising concerns about inflation. This data, combined with tariff-related executive orders, has boosted expectations that the Federal Reserve will cut interest rates in June, according to the CME's FedWatch tool.

Chinese tech stocks have emerged as top performers. According to CFRA's analysis, companies like Alibaba Group Holding Limited (BABA), Tencent, and Xiaomi were the biggest contributors to emerging market ETF returns this year. The KraneShares Hang Seng TECH Index ETF (KTEC) grew 25.7% since January 20.

European defense stocks have also rallied after direct discussions between the U.S. and Russia regarding the Ukraine conflict. The Europe-listed Select STOXX Europe Aerospace & Defense ETF gained 23% so far this year.

Gold continues to shine as the best-performing major asset class recently, driven by central bank demand, with the SPDR Gold Trust (GLD) gaining 5.2% over the past month, etf.com data show.

For investors, the coming months will likely see trade policy and inflation serving as key determinants of whether U.S. equity ETFs can regain their edge over international alternatives, according to CFRA's outlook.